Qatar: what’s next for the world’s most aggressive deal hunter?

As the global economy recovers, the nation must grapple with the end of sky-high returns

On a visit last year to Qatar Holding’s headquarters, a Gulf banker stepped inside a boardroom, intrigued by what he glimpsed as he walked past. His attention fixed on a set of whiteboards, each scrawled with the names of an array of global companies. This, he suspected, was a shopping list.

Some of the companies, including Valentino, the Italian fashion label, had already been bought by other Qatari investors. So had a stake in Germany’s Siemens, which was also on the boards. Printemps, a French department store, would be snapped up months later.

“It was as if there was no company that doesn’t interest them,” the banker says.

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The wish list illustrates the seemingly unlimited ambition – and resources – of Qatar, a small Arab state that in just a few years has parlayed its enormous gas riches into an extraordinary investment portfolio. For Qatar’s cash-rich sovereign wealth fund, the financial crisis proved to be a buying opportunity.

“We have cash,” Ahmad al-Sayed, who on Tuesday was promoted to chief executive of Qatar’s sovereign wealth fund, remarked in 2009. “Cash is king.”

The state flexed its financial muscle through a wide range of corporate and royal investments. But it is Qatar Holding, the vehicle of its sovereign wealth fund, the Qatar Investment Authority, that has upturned the investment world. As its clout increased, the QIA negotiated alongside some of the world’s most powerful business and political leaders, among them Tony Blair, former UK prime minister, and Nicolas Sarkozy, France’s ex-president, during sensitive transactions.

Since 2009, Qatar Holding received $30bn-$40bn a year from the state, lending it such astonishing financial power that normal rules of investing did not apply; losses could be easily absorbed and big gambles taken. It also was able to extract unusually favourable terms.

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“They were providers of liquidity in an illiquid world. The opportunities for them were different from other institutions,” says a western adviser. “And you don’t take an idea to them without a significant return.”

Yet the unique market conditions that allowed the QIA to build its investment portfolio have passed. Stock markets have rebounded strongly since the depths of the crisis and economies have stabilised. As investor confidence returns, the privately negotiated deals, generous terms and big discounts that Qatar demanded and often received may become a thing of the past.

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Months before the dynastic transition, Qatar Holding brought in consultants including McKinsey and PwC to conduct an extensive internal review of how it operates. It was led by Mr al-Sayed, the 37-year-old lawyer who has overseen the fund’s growth since 2009. The review appears to be a recognition that the young fund needs to adapt to become a more robust institution – less of an extremely well capitalised start-up and more like the investment arms of established peers in Abu Dhabi and Kuwait.

When Sheikh Hamad bin Khalifa al-Thani handed power to his 33-year-old son, it rattled the investment banking community. But it was not the emir’s abdication that worried the bankers, who have raked in millions from Qatar Holding’s frenzied dealmaking. Instead, they were concerned about the fate of Hamad bin Jassim, the long-time prime minister and foreign minister who resigned at the same time as the emir. They had reason to fret. Within a week, HBJ, as the billionaire is often referred to by foreigners, was out of the QIA.

HBJ set the style and tone of Qatar’s investment drive. “Personalities have much more of an impact at the QIA,” says a Gulf banker, comparing the fund with other sovereign vehicles in the region. “When you’re setting up something new, you’re setting the tone, the culture.”

The team steering the QIA

Sheikh Tamim, 33, is the second son of the former emir and Sheikha Moza. Educated at Sherborne and Sandhurst, the new emir’s career grew from the military into local roles in sports, technology and education. Sheikh Tamim is expected to refocus attention away from international affairs back on to Qatar’s domestic scene.

Ahmad al-Sayed, 37, QIA chief executive. The new CEO was promoted to the role after steering Qatar Holding, its direct investment arm, through the financial crisis. He is a technocrat who has ascended the ranks from his role as a legal adviser. Mr al-Sayed studied banking and financial law at Boston University and also has an executive MBA.

Sheikh Abdullah bin Hamad bin Khalifa al-Thani, 25, QIA vice-chairman. His appointment marks another promotion for the second son of the former emir’s third wife. Three years after graduating from Georgetown’s Doha campus, the low-profile royal runs the ruler’s court and has taken several board positions, including with Vodafone Qatar.

Sheikh Hamad bin Jassim al-Thani, 53, former chief executive of the QIA. He has been the former emir’s right-hand man since aiding the palace coup of 1995. As foreign minister and prime minister, his business acumen and diplomatic savvy raised the country’s profile as a go-to investor and regional mediator. But his interests also stirred disgruntlement.

Hussain al-Abdulla, 56, QIA board member. Known as “the Doctor” – a nod to his PhD – he has dedicated his long career to Qatar’s public finances. Gaining a foothold at the QIA as an executive board member under the former chief executive, he came through the government bureaucracy, starting in the economics department of the emir’s office in the early 1980s.

Ali Sherif al-Emadi, QIA board member. As chief executive of Qatar National Bank, the US-educated Mr Emadi served as an understudy to Youssef Kamal, the experienced finance minister and QNB chairman. Mr al-Emadi’s brother is also married to Mr Kamal’s daughter, making the transition to a younger generation another family affair.

Sheikh Tamim, the new ruler, has long been the chairman of the QIA. His statement last week that he wanted to avoid behaviour that appeared arrogant was taken as a veiled reference to HBJ’s brash style, both in politics and finance.

Some bankers worry that HBJ’s departure will mean a slowdown in the pace of external investment. HBJ was the principal generator of deals, using his impressive roster of political, business and banking contacts. (Credit Suisse, in which Qatar Holding has a minority stake, has been used more than most.) Qatar, in fact, has seen “every good deal in the world almost directly”, as one private equity manager puts it.

HBJ’s brinkmanship, along with a diplomatic mediation by Mr Blair, clinched Glencore’s takeover of Xstrata, the miner in which Qatar Holding had a stake. But the deal was completed only after Doha squeezed out a higher price.

The grandson of a pearl trader, HBJ is a contrarian and a consummate dealmaker. “With HBJ, you have seven minutes to tell him the circumstances of a deal and he’ll give you a reaction in seven seconds,” says a person who has done business with him. “He judges how good a deal is by how far he can push you . . . it’s a culture that goes through the organisation. They leave nothing on the table.”

At times, he invested personal funds in Qatar Holding deals, an example of the blurring of roles in the autocratic Gulf state.

Long-time observers in Doha say that HBJ’s outsized power and his personal wealth – he is thought to be richer than the outgoing emir – made other members of the royal family uncomfortable and hastened the transition to Sheikh Tamim. It is an open secret in Doha that HBJ and Sheikha Moza, the new emir’s mother, have not been on the best of terms. Analysts say that HBJ’s departure was linked to the emir’s abdication, giving the younger ruler the room to assert himself.

Even before the dramatic events in Doha last week, HBJ was stepping back from the fund. Although the bankers close to him will be disappointed, his departure clarifies the lines between political leaders and the state’s sovereign wealth fund. This could accelerate the fund’s evolution into a more professional institution.

That Mr al-Sayed, a protégé of HBJ, should have replaced him came as a surprise to the financial community in Doha and beyond. It was assumed that another prominent member of the al-Thani family would be handed the job. Like his mentor, Mr al-Sayed is known for a tough negotiating style, often leaving his counterparts guessing about whether he will close a deal until the last minute.

But he is also a tireless worker and loyal servant to the al-Thanis, part of a new generation of Qataris now being promoted by the young emir. According to one person who has done business with Qatar Holding, Mr al-Sayed has also played his cards well, helping Sheikh Tamim in some private acquisitions.

Mr al-Sayed earned a master's degree in banking and financial law from Boston University. Promoted from legal counsel to chief executive of Qatar Holding in 2009, he came in, as one banker says, “on the ground floor” and rode the recovery cycle. People close to the fund say that it has delivered upward of 17 per cent a year in average returns since 2009.

But gauging the success of Qatar Holding’s deals is not straightforward because their financial structures are often not disclosed. Bankers say that a majority of its investments are not the high-profile deals but in undisclosed trading of shares.

Some of the fund’s biggest investments have done very well, including its participation in the Barclays cash calls of 2008, which netted about £1.7bn after the staged sale of its warrants in the British bank, according to Reuters estimates. The fund still holds 6.7 per cent of Barclays.

Its bet on the merger of Glencore and Xstrata has also paid off. The value of its stake has more than doubled, according to Financial Times calculations.

However, some of its other deals do not look so bright. Shares in Iberdrola, the Spanish utility, are down 22 per cent since March 2011 when the fund took a 6.2 per cent stake. Its stake in Hochtief, the German construction group, may have also lost value as the shares have sunk more than 13 per cent since it declared its 9.1 per cent stake in December 2010.

Mr al-Sayed’s future is now secure. “He’s the guy who for the last four years has been leading it day-to-day, so his promotion means continuity, no disruption, particularly as Sheikh Tamim has been the chairman of QIA,” says a senior western banker. “Now Ahmad has to go only to Tamim. In a way it will make things smoother.”

The Doctor

People who have had dealings with the fund say the top job at Qatar Holding was slated to go to Hussein Ali al-Abdullah, a QIA board member in his 50s. In investment circles, he is known simply as “the Doctor” and was also a mentor to Mr al-Sayed. He is considered to be the founder of Qatar’s sovereign wealth fund, arguing for the need for a nest egg for Qatar’s 300,000 nationals – and to prepare for when the gas riches run out.

Considered a calm, wise hand, Mr al-Abdullah has preferred to maintain an oversight role rather than thrust himself into the daily management that keeps Mr al-Sayed busy until late into the night. He too is staying on as a board member of the QIA.

It was the Doctor who declared last year that the investment strategy of Qatar Holding could be summarised in two words: “No strategy”. The statement encapsulates perfectly the fund’s single-minded pursuit of deals.

To a large extent, the fund’s investments have been driven by a simplistic rationale.

Qatar Holding made its mark in London in part because it is a market in which the royals feel comfortable. The same could be said for the Volkswagen-Porsche deal in 2009 that put Qatar Holding on the map.

Goldman Sachs was the first to suggest that Qatar buy into Porsche in the spring of that year as the car company was engaged in a heated feud with VW. But HBJ’s interest is thought to have already been piqued by a meeting with a member of Porsche’s board.

As with London property, there was a personal magnetism at work. HBJ loved Porsche cars, as does Mr al-Sayed, who led the negotiations on the transaction. As the battle between Porsche and VW raged on, Credit Suisse, Qatar Holding’s adviser, suggested a bolder plan: that the two companies merge. The idea captured HBJ’s imagination.

He travelled to Germany for high-level talks, including a meeting with Angela Merkel, chancellor, while Mr al-Sayed negotiated with provincial officials and company executives.

“They [the Qataris] took a gamble on recovery, and they won – they rode out the storm and are now making money hand over fist,” says a banker who was involved in the deal. In June this year, Qatar Holding sold its 10 per cent stake in Porsche back to the owning families, rounding off the Qatari role in the complex merger.

The VW-Porsche deal reflected the image of Qatar that the al-Thanis were looking to project – that Arab hydrocarbons wealth could be deployed shrewdly.

It is a matter of national pride that Qatar Holding has taken board seats at big companies, from the owners of Heathrow and Canary Wharf in the UK to Credit Suisse and Volkswagen, making decisions that are relevant to some of the world’s most prominent companies. The board seats are seen as a way to groom the next generation that is now taking over.

Hard bargaining

Qatar Holding’s hard bargaining worked at a time when there were few other investors looking to take on risk. But the fund has also developed a reputation as a difficult partner that would be best avoided – particularly when it comes to property deals. When the fund bought buildings directly, it was criticised by other property investors for over-negotiating and bullying sellers.

“They don’t buy property like anyone else; they treat it like corporate M&A,” says the head of one of the world’s largest property fund managers. “Everyone negotiates hard but there are very few deals when one party literally walks away hoping they never see the other again.”

In France, where it has widespread real estate investments, Qatar’s dealmaking has stirred political controversy. In 2008, Mr Sarkozy, then president, pushed for a law exempting Qatari real estate investments from capital gains taxes, so eager was Paris for more Qatari funding. But when Doha sought to invest in the capital’s suburbs, there was an outcry that the Gulf state was buying influence among France’s restive Muslim youths.

The Qataris met their match while haggling over Harrods, one of London’s great brands. The fund spent a year negotiating for the £1.5bn purchase of the luxury retailer from Mohamed al-Fayed, the Egyptian tycoon. This time, it was Mr al-Fayed who threatened to pull out.

Mr al-Fayed tried to sell the store without the underlying real estate, a proposal dismissed by the Qataris. He attempted to throw his Fulham Football Club into the mix but the Qataris wanted the Ritz in Paris instead.

“The Harrods negotiation was tough and mercurial throughout. They – al-Sayed and Fayed – were both mad as mongeese,” says one banker who was involved in the deal.

Even within the oil-rich Gulf, where sovereign wealth funds from Kuwait to Abu Dhabi are powerful international financiers, Qatar Holding and its parent, the QIA, are unusual vehicles. It is now in the midst of the internal review to move on to what a person close to the fund calls “the next stage.”

The fund needs to determine exactly what kind of investment group it wants to be. Qatari officials hate being described as having “deep pockets”, saying it insinuates that they are willing to overpay for assets. (Some bankers say this is true in some cases.) Instead, says one former staff member, the objective is to be thought of as a big private equity group, such as a Blackstone or a KKR.

There are some similarities. Although Qatar Holding says it had no debt at the end of 2012, bankers say it used debt in some deals to maximise returns and manage liquidity. “Sometimes they use it to hit a mythical returns number. They just like to use other people’s money,” says one banker.

Qatar Holding has often asked its bankers to assemble deal structures with ample downside protection, whether through warrants, debt funding from the banks or companies targeted for acquisition or high yielding convertible bonds.

The long game

Compared with other Gulf funds, the QIA’s size, agility and investment style seem like a private equity group. The Abu Dhabi Investment Authority is a 1,400-strong bureaucracy and invests the bulk of its assets in externally managed index-tracking funds; it acts more like a pension fund. The Kuwait Investment Authority has a staff of about 475 across Kuwait, Beijing and London.

In contrast, Qatar Holding is exceedingly thin, with only 40 professional staff even though it has accumulated more than $100bn in assets during the past four years.

But Qatar Holding has an advantage over private equity firms. It is, in essence, accountable only to one shareholder – the emir – and it can act as a longer-term investor.

Staying lean has worked well for the fund so far. But for all the advantages of not having to get approval for deals through a chain of bureaucracy, as at ADIA, there are signs it is time for Qatar Holding to create a more formal structure.

At Qatar Holding, decision making is so centralised that its bankers never call the shots. And like many employees in Qatar their movements in and out of the country are controlled by their employers in an archaic labour system.

“You can’t get a piece of paper signed without Ahmad deciding, which creates bottlenecks,” says a senior banker. “But that’s the system, it’s not a democracy,” he adds.

Anthony Armstrong, a high-flying American banker at Credit Suisse, was seconded to the fund after advising Qatar Holding on the complex VW-Porsche acquisition. He came to Qatar expecting to oversee some of the biggest deals of the financial crisis. But, according to people close to him, he felt powerless and could not wait for his 18-month stint to finish.

Frustrated, Mr Armstrong took a business trip home and never returned. He was not available for comment. But he is one of several people who left the fund in the early stages, reflecting what they said was an internal chaos that undermined the fund’s potential.

People close to Mr al-Sayed dismiss such criticism, arguing that he might be a hard-driving manager but that the atmosphere in Qatar Holding is friendly and staff turnover low. But management is waking up to calls for a more institutionalised fund. Qatar Holding is seeking a rating that would bring a measure of transparency. It is also expected to focus more on infrastructure and commodities investments, hoping to generate steady streams of cash flow.

The biggest challenge, however, could be a shift in the investment climate. Having dominated the inward investment market for London property since the start of the financial crisis, Qatar has been overtaken in the past six months by a new wave of sovereign wealth interest, most notably from Norway and Malaysia.

In banking too, Qatar recently discovered, with its stake in Russia’s VTB, that it is in a different position from a few years ago. The Qataris had hoped to finance all of VTB’s capital needs but their allocation came second to Norges, the Norwegian pension fund.

For most investors, navigating through the financial crisis was a struggle for survival. For cash-flush Qatar Holding, it was a once-in-a-lifetime opportunity. Only today, with the combination of a stronger global economy and the waning influence of its dominant figure, HBJ, will it face its real test.

But for a small state that realises that the source of its success is finite, there is no question that it will continue to scour the globe for places to put its cash. As one Qatari official once put it: “If we spend all our money in Qatar, every Qatari would have a house on the moon.”

A potent symbol of intent in any market, western Europe’s tallest skyscraper – built in the depths of the financial crisis – became one of the world’s most talked about properties before the first storey was complete. Financed by a consortium of state-backed Qatari funds, it was, many argued, little more than a vanity project; an economically flawed blight on the London skyline.

Today, almost a year after completion, The Shard is giving its critics reason to feel vindicated: costing about £1.5bn, the glassy spire rises empty but for a scattering of mostly Qatari-backed tenants.

It is because of this, and similar deals that have done more to raise profile than returns, that the tiny state is desperate to shake off its image as a deep-pocketed trophy hunter.

The Shard: symbol of intent

The push towards commercialisation reflects Qatar’s need to distinguish itself from the wash of sovereign wealth funds that have poured into the property market in the past three years.

In 2011 Qatar was the largest overseas investor in UK property, spending more than £1bn on a spread of deals that included buying almost 1,500 apartments used to house athletes during the London Olympics. By the end of 2012, spending just £680m, it had slipped behind the newly aggressive sovereign wealth funds of Norway, Malaysia and China, according to data from Real Capital Analytics.

“In their heyday, when the rest of the investment world was lying down, they were a young fund with a lot of ambition and firepower to match,” says a person who has worked on Qatar-funded deals. “They had the market to themselves . . . but the investment case was as much to do with political gain as commercial logic.”

Those close to Qatar suggest the slowdown in spending is symptomatic of the peninsula’s transition towards becoming business-minded.

Apart from reining in dealmaking, its ruling officials are looking at centralising the property investing process.

The move, which would mark a departure from the complex network of investment vehicles it has used to trade property, was given added credence by the announcement this week that Ahmad al-Sayed, the head of Qatar Holding, the state’s direct investment arm, will also run the Qatar Investment Authority, its parent.

“They are evolving, but as the world becomes more efficient, they are having to rethink the kind of deals they want to do and the kind of image that they want to present,” says an investment banker close to the QIA.